US aid freeze hits health, development projects in Nepal

Nepal has been forced to halt a number of US-funded development projects in recent days, after President Donald Trump ordered a 90-day pause in US foreign assistance on the day he returned to the White House.  

The Himalayan nation's Finance Ministry said USAID-financed projects in the fields of education, health and agriculture, among others, have been affected.

Last week, Nepal was informed that the freeze also includes the multimillion-dollar grant assistance provided to the country by the Millennium Challenge Corporation (MCC), a US government aid agency.

What's the MCC grant about?

In September 2017, the MCC agreed to provide $500 million (€480 million) for Nepal to upgrade dilapidated road networks and build electric lines in the Himalayan nation, one of the world's poorest countries.

The agreement, signed during Trump's first presidential term, remained stuck in Nepal's parliament due to differences within the then-ruling coalition government and criticism from other political forces.

Opponents said the grant would undermine Nepal's laws and sovereignty as Kathmandu would not have sufficient control over the projects. But supporters argued that it would economically benefit the landlocked country.

The MCC project also fueled geopolitical tensions, dragging the US and China into a faceoff in Nepal as their diplomats indulged in verbal barbs. At the time, China accused the US of playing "coercive diplomacy" and pressuring Nepal to accept it.

Nepal's parliament finally ratified the pact in February 2022.

A "wait and see phase"

The latest suspension of US aid has drawn mixed reactions in Nepal.

While those who opposed the MCC deal from the beginning welcomed the decision, supporters of the pact were upset.

Pradeep Gyawali, a senior leader of the ruling Communist Party of Nepal-Unified Marxist-Leninist (CPN-UML) and former foreign minister, warned that the abrupt halt in US funding poses serious challenges to Nepal. He said the funding cut is affecting programs related to education, poverty alleviation and health care, including those targeting child and maternal mortality rates.

The nation of about 30 million people is already grappling with a high budget deficit and struggling to finance key development programs.

Shyam Bhandari, a spokesperson for Nepal's Finance Ministry, told DW that the government is in a "wait and see phase" as the aid is currently halted only for 90 days.

"A final decision on alternatives can only be made if the suspension becomes permanent. For now, we remain hopeful that MCC funding will resume," he said.

Tough to replace US funding

Indra Adhikari, a member of Nepal's Policy Research Institute, expressed surprise at the US move, particularly after Washington pushed Kathmandu hard for ratification of the compact.

"If the US withdraws, other players may step in," she told DW, referring to Nepal's powerful neighbors China and India.

"There is intense geopolitical competition, and any vacuum will be filled by another power."

 Adhikari also argued that Beijing could use the situation to portray Washington as an unreliable partner, even without stepping in directly.

Treading the line 

Anil Giri, a senior diplomatic correspondent for The Kathmandu Post, told DW that it wouldn't be easy for Nepal to replace US assistance.

If Nepal were to invite either China or India, it would be viewed with skepticism and suspicion in the other country and create further geopolitical complications.

Gyawali, the former foreign minister, echoed this concern.

"It would be wiser to explore neutral funding sources such as the Asian Development Bank or the World Bank, potentially as soft loans," he said.

Edited by: Srinivas Mazumdaru